Tax Policy Must Be Proportionate to Spending Policy

March 04, 2016
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Former presidential candidate Mitt Romney this week voiced his concerns about current presidential candidate Donald Trump’s fiscal policy, including his tax plan:

His tax plan in combination with his refusal to reform entitlements and honestly address spending would balloon the deficit and the national debt. So even though Donald Trump has offered very few specific economic plans, what little he has said is enough to know that he would be very bad for American workers and for American families.

This concern has been raised elsewhere: for example, at the most recent GOP debate, and in a report by the Committee for a Responsible Federal Budget. There they used Tax Foundation’s analysis of Trump’s tax plan, along with several others, in order to provide a total estimate of the fiscal policies proposed. Even with the economic growth we believe that Trump’s plan could create, the candidate’s plans listed on his website so far will increase the deficit by about $11.7 trillion over ten years.

But here’s the important caveat from our September analysis of the Trump plan: “According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly reduce marginal tax rates and the cost of capital, which would lead to an 11 percent higher GDP over the long term provided that the tax cut could be appropriately financed.”

So far, we’ve seen no indication that the tax cut will be appropriately financed. So here’s a brief explanation of how our model works, and why the results may not apply with such a large deficit. Our model is essentially built around the assumption that the tax system proposed is sustainable and permanent. If that’s the case, the size of the tax system one proposes must be roughly similar to the size of the government that one desires.

That is generally true of most lawmakers, but it hasn’t proven particularly true for Donald Trump, who has thus far proposed a set of policies that is unsustainable. So if the plan were tried in real life, we wouldn’t expect it to just run huge deficits in perpetuity. Instead, it would go one of two ways.

The first path is one we’ve seen in the United States before. The federal budget was pretty unsustainable during World War II, for obvious reasons, but after the war was over we pared back federal spending and put together a tax policy that could fund the government.

The second path is one we’ve seen in countries like Zimbabwe, where people lose confidence in the currency and it eventually becomes worthless. Such countries then find it difficult to borrow in international credit markets.

I don’t think Donald Trump, nor anyone else, wants to see the U.S. go down the second path. So one sort of has to assume that he would have to choose the first, abandoning some of his tax or spending priorities to make his budget line up better. This gets to the heart of one of the principles of good tax policy: your tax policy should actually be able to fund the government you want. One way or another, Donald Trump will have to assent to this principle.

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